European Energy Security Through Gas: The Netherlands, And The Viability Of The Gas Roundabout
Following the discovery of the Groningen gas field in 1959, a giant natural gas field located in the northeast of the country, the Netherlands started to become heavily involved in the domestic production and international exportation of natural gas. After earthquakes in the Groningen region were linked to the production of gas, the Dutch government decided in January 2014 to reduce output from the gas field and pay restitution to those affected by the earthquakes. In 2014, the amount of gas produced at the field was reduced to 42.5 bcm and is expected to drop to 40 bcm by sometime next year. This sensitive issue has brought about a great deal of stress to Dutch gas players, such as GasTerra, a Dutch company active in the European trade and supply of natural gas, centered on whether the Netherlands ambition to become Europe’s gas roundabout will be realized. Here, finding the right balance between dissatisfied policymakers and domestic producers of Dutch gas is crucial.
According to Gasunie, a European gas infrastructure company specializing in the transport of natural gas and green gas in the Netherlands, the Netherland’s aspiration to become Europe’s ‘gas roundabout’ is an intricate plan requiring a connected junction of gas infrastructure elements for production, transport, storage, transit, trade and knowledge development. All of these elements create a flexible gas trade that stimulates the availability of gas for its users and has a cushioning effect on gas prices. In spite of the fact that domestic gas production in the Netherlands is expected to steadily decline over the coming decades, the country wants to maintain its position as a gas supplier, by shifting from a gas producer into a merchant of imported gas. In order to make this transition, transmission pipelines have been laid, gas storage facilities have been built and parts of the gas transmission network outside the Netherlands have been acquired.
In 2012, the Netherlands Court of Auditors investigated how the government originally justified the need for the gas roundabout and how the Dutch parliament was informed about the process. The final report stated that the minister of economic affairs didn’t carry out detailed studies to substantiate the need for the gas roundabout. A study was carried out in 2010, but by then EUR 7.2 billion had already been invested in the gas roundabout. In addition, the information the parliament received on the gas roundabout failed to sufficiently explain why the chosen strategy was the best option to secure energy supply, nor how the public interest is served, or which risks were taken by the state on the investments. Overall, there appears to be conflicting viewpoints regarding whether the Netherlands should continue to invest heavily in the production of natural gas.
The benefits for the Netherlands in remaining a gas producer may currently outweigh the costs, especially in light of the investments already devoted to the gas roundabout. However, one of the main disadvantages of the offtake agreements in place as part of the gas roundabout strategy is that they give producers reduced incentives to respond optimally to short-term changes in market conditions compared to a competitive market, according to the CPB Netherlands Bureau for Economic Policy Analysis. However, it appears that restricting production from Groningen field will result in positive outcomes for security of supply, but eventually the Netherlands will have to face the fact that it will become an importer of natural gas and transition into a trading role. Ultimately, the local gas producers have a shrinking portfolio, which according to GasTerra CEO, Gertjan Lankhorst, “would happen anyway, due to the decline in production,” but what many companies operating in this space are currently focused on is restructuring in order to become more flexible, smaller and more efficient.
Article by Angelo Basurto